Ethics and Economic Success

The current global economic crisis and the particularly harsh competition between organizations that resulted from it has once more brought into focus the question whether economic success can be achieved when adhering to ethical standards. It is often argued that organizations are designed merely as profit making mechanisms, which cannot afford to consider ethical principles since they have to survive under conditions of harsh competition. However, do ethics in business and economic success really contradict each other, or can the observance of ethical standards even be beneficial for organizational success? The purpose of this issue is to shed light on this question by discussing recent research pertaining to the relation between ethics and economic success. Furthermore, it is our goal to clarify what adherence to ethical standards may mean in a business context and to lay out a research agenda in order to stimulate future investigations.

In a widely cited article on the role of business in society, the Nobel Prize-winning economist Milton Friedman declared “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (1970, p. 126). Thus, Friedman and his followers regard profit maximization as the main responsibility of business, which is only restricted by law and common morality. Consequently, managers’ duties largely consist in maximizing shareholders’ return on investment. In accordance with this view by theorists propagating shareholder value, business is commonly regarded as “amoral” in popular culture (Werhane & Freeman, 1999). However, although applying ethical standards to management practice might be difficult, the assumption that ethics and business can (and should) be separated entirely is a misconception. As Werhane and Freeman stress “ethical issues are as much an integral part of economics and commerce as accounting, finance, marketing, and management” (1999, p. 2). This is the case because every economic decision is based on a belief system that presupposes certain basic values, such as principles of fairness. How ethical considerations, specifically perceptions of (un)fairness, influence economic decisions has been demonstrated in a large number of experiments employing ultimatum games in which a positive monetary reward is shared between the proposer and the responder and the responder can only accept or reject the proposer’s offer: When responders are offered less than a third of the overall monetary reward, they are more likely to reject than accept the offer – thereby deviating from the model of a purely profit-maximizing rational homo oeconomicus (cf. Güth, 2008). Furthermore, ethics and business are also inherently connected to each other because every business decision affects people or relationships between people, whether intended or not. Since organizational decisions affect a broad range of people, not only shareholders, but also other stakeholders such as employees, suppliers, customers, and entire communities, organizations carry responsibility for these groups (cf. Frey, Nikitopoulos, Peus, Weisweiler, & Kastenmüller, 2010; Werhane & Freeman, 1999). The organization’s responsibility toward these and other stakeholders is not only based on the fact that no business could survive without them for an extended period of time, but foremost results from the fact that these stakeholders are human beings with their own rights and legitimate aspirations. Consequently, conducting business in concordance with ethical standards in our view means acting in consideration of the legitimate expectations and aspirations of the various stakeholders. This requires organizational members, in particular managers, to be aware of these aspirations and to deliberate their meaning and relative importance each time a decision is made. In short, it means being aware of and acting in accordance with one’s overall responsibility. A useful guideline for managers and employees alike is Kant’s (1785/1993) categorical imperative: “Act only according to that maxim whereby you can at the same time will that it should become a universal law”. Furthermore, as Evan and Freeman (1988) argued, Kant’s formulation of the principle of never treating others as “mere means” could be a useful basis for meeting ethical standards in business organizations (cf. also Frey, Kerschreiter, Winkler, & Gaska, 2004).

Applying ethical standards to organizational practice may be more difficult than it might seem from these basic rules, wherefore it is often regarded with skepticism or even cynicism, (see the discussion by Wieland (2010)). However, adhering to ethical standards may not only not disadvantage businesses in the long run, it may actually be beneficial for their economic success (at least under certain circumstances). In concordance with this assumption, preliminary evidence points to the fact that organizations that have a stable core mission and vision which goes beyond profitability and pays consideration to other stakeholders are actually more profitable and survive longer than competitors without such a vision (Collins & Porras, 1994).

The assumption that adherence to ethical standards may be beneficial for business success is also supported by the research evidence presented in this topical issue. Peus, Kerschreiter, Frey, and Traut-Mattausch (2010) review the literature on the relation between ethically-oriented leadership and objectively measured organizational performance. They define ethically-oriented leadership as “being characterized by a leader’s concern for others, his/her attempt to act in concordance with ethical principles as well as his/her communication of these principles to followers, and finally his/her being a role model to followers” (p. 198). Under the term “ethically-oriented leadership,” the authors subsume the established constructs of ethical, authentic, spiritual, and transformational leadership (in the definition that explicitly contains an ethical component). Objective performance indicators include sales performance of individuals and organizational units as well as percentage of predefined (objective) goals met, performance in several product categories, branch profit as well as profitability of products developed by research and development teams. Overall, the authors report significant positive relations between ethically-oriented leadership and the performance indicators listed above. Furthermore, although definite conclusions about the causality of the relations would be premature, the evidence reported provides more support for the influence of ethically-oriented leadership on objective performance than vice versa: A number of the studies that reported a positive relationship between ethically-oriented leadership and economic success had measured leadership style several years before economic success. Even more importantly, results from a field experiment showed that the systematic facilitation of ethically-oriented leadership lead to a significant increase in business performance compared to a control group. Taken together, the studies reported in this systematic review of the empirical literature provide support for the assumption that ethically-oriented leadership is positively related to business success; however, the overall scarcity of respective investigations demands further research in this area.

Also highlighting the paramount importance of leadership for organizational functioning and long-term success, Strobel, Tumasjan, and Welpe (2010) present two studies that support the idea that organizational leaders’ ethical behavior affects their organization’s attractiveness. Using both experimental and correlational data, the authors show that the perception of ethical leadership behavior is associated with stronger intentions to pursue employment with the respective organization. Furthermore, the authors’ analyses of their second study demonstrate that the effect of potential applicants’ evaluations of ethical leadership on their intentions to pursue employment with the leader’s organization is simultaneously mediated by organizational prestige and general attractiveness of the organization. Even though both studies presented here are based on scenarios and thus await future replication in an organizational setting, this paper discusses an interesting aspect of the relation between ethics and economic success as it is the first to link individual organizational members’ ethical conduct (i.e., ethical leadership) to the respective organization’s attractiveness as an employer.

In another investigation of ethical leadership, Tanner, Brügger, van Schie, and Lebherz (2010) argue that a major component of ethical leadership pertains to the question whether leaders’ ethical values are regularly reflected in behavioral patterns across situations and situational challenges. Since the aspect that showing ethical leadership behaviors is substantially more difficult in certain situations than in others is not reflected in the common measures of ethical leadership to date, the authors set out to develop a new instrument, the Ethical Leadership Behavior Scale. This instrument captures behaviors reflecting concrete manifestations of ethical values (e.g., fairness, respect) across occasions and situational challenges. Specifically, by applying the Rasch model to the measurement of ethical leadership behaviors, Tanner et al. are able to differentiate between a person’s performance level and the difficulty for each behavior. Behavior difficulty is thereby defined as the probability that anybody will behave in a certain way, regardless of their specific attitude or motivation to act. Tanner et al. thus pay tribute to the fact that showing ethical leadership is more difficult and thus less likely in some situations than in others – for example, when leaders acting ethically would put their own career at risk. Presenting data from a field study conducted in 110 work units, Tanner et al. provide evidence for the validity of their scale. Furthermore, they report the level of ethical leadership behavior to predict important work-related attitudes such as job satisfaction, work engagement, and affective organizational commitment as well as important outcomes such as health complaints, emotional exhaustion, and absenteeism. Hence, this study also supports the assumption that adherence to ethical standards (here: ethical leadership) is positively related to organizational functioning and business success.

Finally, Schönborn investigates the relation between corporate culture and corporate success. His study is based on the responses of 2,873 persons (employees as well as middle and upper management) from 46 organizations who participated in an online survey capturing all of the levels of corporate culture identified by Schein (1990). Their assessment of corporate culture was then related to the organizations’ business success as assessed by balance sheet statistics, expert discussions, and external certified accountants. The results indicate that successful companies’ profiles of cultural variables differ from unsuccessful companies’ profiles of cultural variables: Successful companies tend to value corporate citizenship and responsibility, that is, explicit orientation toward competence, involvement, and employees’ job satisfaction, more than less successful companies. Therefore, Schönborn provides evidence for a positive relation between a value-oriented corporate culture and corporate success.

Altogether, using various methods and samples, the articles assembled in this topical issue provide support for the assumption that adherence to ethical standards is positively related to organizational success. However, we are aware that the studies presented in this topical issue represent only an excerpt of the current research in this area. Furthermore, the process of reviewing submissions and compiling the studies to be included in this issue clearly demonstrated that there is a scarcity of studies examining the relation between aspects of ethical conduct and objective measures of business performance. Thus, additional research in this area is needed before definite conclusions can be drawn. An aspect that seems particularly relevant to include in future investigatio ns of the relation between meeting ethical standards and achieving business success are potential moderators. For example, factors such as environmental uncertainty or national culture(s) the company operates in as well as the position of its competitors are likely to serve as moderators at the extra-organizational level. Pertaining to the organization itself, aspects such as the company’s size, age, structure, area of operation, or employee composition seem worthy of investigation as potential moderators of the relationship between ethics and economic success. Examples of current and planned research efforts investigating the relation between ethical conduct and various organizational outcomes are presented in the Horizons section of this issue.

Overall, it is our hope that the original research, literature review, opinion piece, and description of current activities in the area of ethics and economic success presented here will not only provide a useful overview and important insights but also stimulate future research in this area.